Assessing the Materiality of Nature-Related Financial Risks for the UK

The objective of this project was to assess the materiality of nature-related risks to the UK financial sector both in the near-term and the longer-term. At least half of global GDP is moderately or highly directly dependent on nature, and ultimately there is no economy without its critical services, including clean and abundant water, clean air and food. Nature across most of the globe has now been significantly altered by multiple human drivers, such as land-use change, pollution, extraction of minerals, abstraction of water and climate change. Statistics on the current state of biodiversity loss and environmental degradation are alarming: the extent and condition of ecosystems has declined in 50% of natural ecosystems, including more than 85% of wetland area lost, and 25% of species are at risk of extinction (IPBES, 2019). The 2019 Global Assessment Report of the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) concluded that fourteen of the eighteen ecosystem services that were assessed had declined since the 1970s. The United Kingdom is no exception. The percentage of UK habitats ‘in favourable or improving conservation status’ has been deteriorating since 2007, exacerbating impacts on our soils, pollinators, air and environmental pollution, water and flood protection. Our analyses show that 75% of the United Kingdom is covered by at least one hotspot of natural capital depletion, and 25% is covered by two or more hotspots of natural capital depletion. The UK, with its globally interconnected economy, is also exposed to significant global emerging risks. The erosion of UK and global natural capital generates significant and long-term risks to society and the UK economy and financial sector. Studies by Central Banks around the world have highlighted the high degree of dependence on nature and the exposure of financial portfolios to nature-related risks. What is not yet clear, is the extent to which this is a material risk to financial stability, on a par with other risks on the radar of Central Banks, and if so, on what timescales this risk could emerge and where it might ‘fall through the cracks’ of current supervision and regulation.